Apple not guilty in iPod antitrust trial, jury decides

Had Apple lost the class action case, more than 8 million iPod owners who purchased devices between September 2006 and March 2009, along with hundreds of retailers, would have been collectively eligible for up to $1 billion in damages.
Josh Miller/CNET

OAKLAND, Calif. -- Apple was found not guilty of anticompetitive conduct Tuesday in an almost ten-year-old antitrust case alleging the company harmed consumers and quashed digital music industry incumbents when it barred competing music stores' songs from playing on its iPod music player.

Exactly two weeks since the start of the trial, an eight-person jury returned the verdict after fewer than four hours of deliberation.

Ultimately, the jury had to decide whether an update to Apple's iTunes music store rolled out in 2006 constituted so-called genuine product improvements. iTunes 7.0, as it was called, introduced video, album art and numerous other features for the desktop software and its companion iPod software.

But the release also contained a security feature that disabled a consumer's iPod if it detected songs from competing music stores that had reverse-engineered Apple's FairPlay digital rights management technology. That technology restricted how a digital music file could be played based on the terms of Apple's deals with record labels. The updated software demanded consumers restore the iPod to factory settings, effectively deleted those competing music stores' songs.

Under the Sherman Antitrust Act, a genuine product improvement cannot be considered anticompetitive, even if it harms competitor's products. "A company has no general legal duty to assist its competitors, including by making products interoperable, licensing to competitors or sharing information to competitors," Judge Yvonne Gonzalez Rogers of the US District Court in Northern California told the jurors Monday prior to closing arguments.

The jury found that Apple's iTunes updates were indeed genuine product improvements. Had they found that Apple did not deliver such improvements, the question then would have been whether Apple had a monopoly on the digital music market and, if it did, whether Apple acted anticompetitively to maintain that position. Because Judge Gonzalez Rogers bifurcated the argument, meaning divided it into various parts, the entire case rested upon whether Apple misled consumers about its software updates, an argument the jury did not buy.

"This is a big sigh of relief for Apple and companies like that because it says they can build innovative ecosystems and they can keep them closed if they think that's best," wrote David Olson, a Boston college professor and antitrust expert, in an email. "They're not forced to deal with competitors if they don't want to so it really allows some freedom in their approach and their design in technological ecosystems."

The plaintiffs are expected to appeal the decision, said Patrick Coughlin, an attorney for the plaintiffs.

"We thank the jury for their service and we applaud their verdict," Apple said in a statement. "We created iPod and iTunes to give our customers the world's best way to listen to music. Every time we've updated those products -- and every Apple product over the years -- we've done it to make the user experience even better."

Apple's duty to deal

At the heart of the case was RealNetworks, a software company whose music store competed with iTunes in the early days of the digital music industry.

In 2004, one year after launching the iTunes Store, Apple controlled 70 percent of all online music sales. Yet that share fell 2 percentage points, to 68 percent, in August when RealNetworks ran a half-off music sale, according to emails between iTunes chief Eddy Cue and former Apple CEO Steve Jobs shown in court.

Aiding RealNetworks' growth was Harmony, a technology that allowed its customers to replicate Apple's FairPlay DRM and add songs to customers' iPods that hadn't been purchased from iTunes. Apple considered this a hack and updated iTunes to prevent iPods from playing songs using the FairPlay technology.

RealNetworks was not named in the suit and none of its executives appeared in court.

Apple claimed in the case that it was not selectively targeting RealNetworks, but protecting itself from other, more malicious hackers. Its record deals were at risk, as were any future deals with television and movie studios that would secure the rights to play video, according to Cue and marketing head Phil Schiller. Both Apple executives testified in the first week of the trial.

The plaintiffs' countered that Apple wanted to maintain its grip on the market and prevent competitors from becoming a viable threat. That would have led to lower iPod prices, the plaintiffs alleged.

Underlying the plaintiffs' argument was the notion that Apple may have a legal responsibility to allow competitors onto its platform and inside its ecosystem, Olson explained last week.

"If it's true that Apple wouldn't share, well could someone contract someone else who could make MP3 players? Was this really preventing a whole area of the market from being competitive?" he said. "Or is this someone saying, 'Hey instead of doing the hard work of building my own product, I want to make them sell my stuff on it?'"

This so-called duty to deal argument was the core pillar of the plaintiffs' case, which argued that Apple should have ensured fair competition by allowing RealNetworks to put its songs on customers' iPods. Apple in turn argued that consumers could burn songs to CDs and then legally upload them into iTunes.

"Sure you can buy from RealNetworks, download it and put it on a CD, upload it back up. But most people wouldn't do that," Olson said. "In effect, even though you technically have that avenue, it's not enough. Your practices are still anticompetitive," he said.

Yet because the plaintiffs case rested on iTunes 7.0, the jury never decided whether Apple had a monopoly and whether it acted to protect that. Had the case gone that far, Olson said, the jury would have faced a case similar to Microsoft's showdown with the US Department of Justice that began in 1998. That trial was over Microsoft pre-installing its Internet Explorer browser on the industry-dominant Windows operating system.

Apple's attorneys argued aggressively against that scenario in closing arguments Monday. "This is all made up. It's lawyer argument," said Bill Isaacson, Apple's lead attorney. "No evidence this ever happened ... there's no consumers, no iPod users, no surveys, no Apple business documents." Isaacson then asked jury not to "hold a great company liable and tell them to stop innovating -- to stop innovating based on nonsense."

Despite Apple's victory, nothing of substantial consumer or corporate interest was at stake. In 2009, all of Apple's music catalog stopped using DRM restrictions. The iPod has been on a steady decline since 2008 and streaming music services like Spotify have begun steadily chipping at the MP3 market. Apple in August purchased Beats for $3 billion to acquire both its audio accessory line and its streaming music business.

Update at 10:55 a.m. PT:Clarified that only iTunes 7.0, and not also iTunes 7.4, were relevant to the verdict.